Summary Real business cycle models state that macroeconomic fluctuations in the economy can be largely explained by technological shocks and changes in productivity.
These changes in technological growth affect the decisions of firms on investment and workers (labour supply). Hence changes in output can be traced to microeconomic and supply-side factors.
Real business cycle models either completely reject or play down the role of aggregate demand in influencing the economic cycle.
Real business cycle models suggest that government intervention to influence demand in the economy is generally counterproductive and…

Evolutionary economics is a branch of economics which views the economy through a dynamic model of constant change, adaptation, chaos and revival. Evolutionary economics was coined by radical economist Thorstein Veblen (1857-1929). Veblen was interested in psychological factors that often gave better explanations for economic behaviour than traditional rational choice theory. For example, Veblen noted the role of social hierarchy and how individuals could be motivated by conspicuous consumption (showing off you could afford designer clothes).
Another important economist in developing evolutionary economics was Joseph Schumpeter. Schumpeter offered a…

The political map of the US increasingly represents a divided America, and this political divide has roots in an increasing economic divide.
In brief – rural areas tend to have lower average incomes (though also cheaper rent) higher rates of unemployment, declining population, reliance on one major employer and more concentrated on the primary sector – farming, mining and commodity extraction.
By contrast, metropolitan urban areas have seen faster rates of population growth,…

The catch-up effect (or convergence theory) suggests that poorer countries will experience a higher rate of economic growth and, over time, get closer to the income levels of the developed world.
In other words, there will be a reduction in the…

Readers Question: Is a strong economy generally accompanied by a strong currency?
In short, a strong economy is generally characterised by a strong currency. When the economy is doing well, and at a boom period of the economic cycle it implies higher interest rates to keep inflation low. These higher interest rates will attract hot money flows and more demand for the currency. A strong economy will also increase confidence in holding that currency. A strong economy may also imply that in the long-term the economy is becoming more…

An entrepreneur is an individual who sets up and grows a business. They combine different factors of production (such as – land, labour and capital) to try and create a new profitable business venture. Entrepreneurs are themselves an important ‘factor of production.’ and an essential aspect of a functioning free market economy.
Importance of entrepreneurs Free market evolution. Entrepreneurs are important in a free market because they help the market respond to changing prices and consumer preferences. For example, with the rise in…

Readers Question: In the U.S. I have noticed that most restaurants and fast food places have window signs advertising for workers. Would these minimum wage workers, as a collective, be considered a monopsony or a monopoly?
To answer your question, these minimum wage workers would be considered neither a monopoly or monopsony. The fact that unemployment is very low, but wages are not rising, suggests it is the firms who have a degree of monopsony power.
If the minimum wage workers were able to organise and form a trade…

Readers Question: Why is debt related to GDP?
Debt to GDP shows how significant the debt is relative to the size of the economy. This is important because it affects
The size of debt compared to tax revenues.
For example in 2018, the gross level of US public debt was $21 trillion. But, with a large economy, this only accounts for 77% of US debt.
At current interest rates, the cost of servicing debt is manageable for the US government.
For example, if total government debt stayed exactly the same, but GDP fell. It…

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